Here Are a Bunch of Year-End Tax Moves To Do Now So Your April Isn't Horrible

By
Sarah Kaufman, Manilla.com

Dec 12, 2013

This time of year typically brings holiday parties, family time and, consequently, excessive drinking, which leaves little time for visits with your tax attorney. Still, it's crucial to use the year's final weeks to financially plan for year-end so that you can ensure you're doing everything you can to lower your 2013 tax bill.

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Roth IRA conversions

This may sound like horrifying tax mumbo jumbo, but we'll make it simple: A Roth IRA is something that may not have immediate tax advantages, but the long-term ones are hard to surpass.

It's an individual retirement account that offers what many Americans may believe to be a fabled phenomenon: tax-free income. There is no up-front tax break for Roth IRA contributions, which means, under certain conditions, the account holder gets to withdraw his money without having to pay tax on it.

This particular benefit is the deal closer for most people — predominantly those who believe they're going to be in a higher tax bracket when they retire than the one they're in currently. But opening a Roth IRA has some immediate tax disadvantages that new account holders need to address.

To start, there are two ways to add money to a Roth IRA: You can contribute money to the account, or you can convert funds from your traditional IRA over to the Roth, says Lisa Hay, CPA and founder of financial planning company Ascend Financial.

The latter is where the tax disadvantage comes in: The money you're converting from your traditional IRA is counted as taxable income, so depending on how much you convert, you could owe a substantial amount of money in taxes or, subsequently, bump yourself into a higher tax bracket.

However, you can offset the increase in income by spreading the conversion over multiple years, or through…

Charitable donations

That's right: Give to charity. Gone are the days of making charitable donations strictly for the benefits of others. The tax deductions from donating to charity may not only help counterbalance your newly increased income from the Roth IRA, but they can also help lower your 2013 tax bill, regardless of the types of retirement accounts you hold, because all charitable donations are tax deductible. Make a list of charities you like, get your donations in by Dec. 31, and save your receipts to make the filing process less irritating.

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Defer your income

Putting off certain portions of your income until next year means not having to pay taxes on them until 2015. One way to do this is with your annual Q4 bonus — if you can do without it right now, consider asking your employer to wait to distribute it until Q1 of the following year.

Keep in mind that this is substantially easier to accomplish if you work for yourself, in which case you have more control over your income and deductions. "There's a lot more playing around you can do if you're self-employed," Hay said.

Tax-loss harvesting

While the increase in stocks this year could yield significant gains in your portfolio, it also means possibly getting hit with a higher capital gains tax bill, says Hay. To lower your bill, you can offset those gains through tax-loss harvesting, which is the act of selling investments that have decreased in value.

For example, let's say Mutual Fund A was worth $10,000, but since last year, it has depreciated in value to $9,000. Meanwhile, Mutual Fund B, which was also originally worth $10,000, has increased in value to $11,000. You can sell the loss in Mutual Fund A ($1,000) to equalize the gain in Mutual Fund B (also $1,000), ultimately eliminating the tax liability of Mutual Fund B.

As a general rule, ask a tax professional for help when you're dealing with complicated tax strategies — everyone's tax situation is different.

Sarah Kaufman is the editor-in-chief of The Manilla Folder at Manilla.com, the leading, free and secure service that helps consumers simplify and organize all of their bills and household accounts in one place online or via mobile apps. Sarah is also a regular contributor to Yahoo! Finance, Good Housekeeping, Woman's Day, Redbook, The Motley Fool, and other sites.

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